The week in energy: The good times roll for oil producers – Financial Times

CERAWeek, the annual jamboree put on in Houston by IHS Markit, has been described as “the Burning Man of energy”: a hectic, crowded gathering of many of the biggest names, and many more would-be big names, from the worlds of oil, gas and power. It has just finished, and if you want to get a sense of what went on on-stage, there are plenty of videos posted on the conference website, although many of the most interesting discussions went on in the corridors and in private rooms.

From this torrent of conversation, a few themes stood out. First, the mood of the energy industry, particularly for oil producers but for other sectors too, has perked up enormously from the gloom of 2016 and last year’s tentative optimism. This year the smiles were broader and the drinks parties more crowded. Attendance was up 15-20 per cent from last year. The improvement even extended to the quality of the food. Brent crude up above $60 a barrel for longer than four months will have that effect. As Mohammad Barkindo, Opec’s secretary-general, pointed out, in the oil business “everybody benefited” from the curbs on production agreed at the end of 2016 by the cartel and its allies including Russia.

Second, the general sense of relief is undercut by unsease about the renewed boom in the US shale oil industry. Soaring US crude production raises the threat of renewed oversupply in world markets and another slump in prices. The International Energy Agency said in its Oil 2018 report that it expected the US alone to supply almost 60 per cent of global growth in demand over the next five years, and possibly more. Mr Barkindo and officials from Opec member states held a dinner on Monday evening with some leading US shale executives, which he described as a way for other countries to hear about how the American industry had achieved its astonishing success. Mark Papa, who as chief executive of EOG Resources was one of the key individuals responsible for the boom getting started, said the conversation was confined to “generalisations and platitudes”. The FT’s David Sheppard observed that Opec was “playing an almost passive role as it watches to see how the market plays out”. Certainly oil companies are still acting as though prices may not have much further to rise, and good drop back again. Bob Dudley, BP’s chief executive, said he expected oil prices now to be on a “fairway” of $50-$65 per barrel: occasionally diverging above or below that band, but mostly staying within it.

The IEA’s forecasts show how strongly it expects US oil production to grow, with most of the increase coming from “light tight oil” (LTO), meaning oil produced from shales and similar reservoirs using horizontal drilling and hydraulic fracturing.

Third, possibly because the immediate crisis has eased, there was more talk than usual at CERAWeek about the implications of climate change. Ben van Beurden, chief executive of Royal Dutch Shell, said the oil and gas industry faced many challenges, including the shale boom, Opec, and shifting geopolitics. He went on: “But I believe the biggest of them is climate change.” Shell has set a target of cutting the carbon footprint of its products, in terms of emissions per unit of energy, by 20 per cent by 2035 and 50 per cent by 2050. The Trump administration is of course the great exception to growing concern about global warming, but even Rick Perry, the energy secretary, gave a nod in his speech to how the US was “likely to continue to reduce the overall emissions of our fossil fuels.” There was a clear sense, however, that he was out of step with the industry in his refusal to engage with the issue in any detail.

At CERAWeek, his department discussed small modular coal-fired power plants: a research project to create new technology that would help support demand for coal. The proposed plants were described a “paradigm shift” for coal-fired power, but the economics of smaller units are questionable. Utility Dive noted that US companies have suggested they are unlikely to build new coal-fired plants of any size, based on its State of the Electric Utility 2018 survey. Taylor Kuykendall of S&P Global pointed out that Robert Murray, the chief executive of Murray Energy, the largest privately held US coal producer, who has been a prominent supporter of President Donald Trump, had been arguing that new coal-fired power generation technologies “deserve government support of their development.”

Another message from CERAWeek was that here is a wide range of views among oil executives about the impact that climate policies and the rise of electric cars could have on demand for their product. Electric cars were much discussed during the week, with Mary Barra, chief executive of General Motors, telling the conference that “our commitment to an all-electric, zero-emissions future is unwavering, regardless of any modifications to future fuel economy standards”. She set out a vision of “a world with zero crashes, zero emissions and zero congestion”. There was a Formula E electric racing car on one floor that attracted a lot of admiring attention. But oil producers could quite rightly point out that electric cars’ share of world vehicle markets is still very small. And as Amin Nasser, chief executive of Saudi Aramco, pointed out, passenger cars account for only about 20 per cent of world oil consumption. Even so, Mr van Beurden raised the possibility that total demand for oil could peak as soon as 2025-26, if the countries of the world make a determined effort to fulfil the commitments they made in the Paris climate agreement of 2015. Mr Nasser, conversely, said he was “not losing any sleep over ‘peak oil demandʼ”.

My final observation was unsurprising: Mr Trump’s steel tariffs are really not popular, and the prospect idea of a global trade war is even less so. Mr Perry and Ryan Zinke, the interior secretary, gave speeches extolling the benefits of the US oil and gas boom, for the country and the world, without acknowledging that higher steel costs would throw grit into the machinery. Mr Perry in his defence of “freedom” in the energy industry, criticised the policies of past administrations that “used one thumb to promote a favourite technology”. It did not go unnoticed that the Trump administration was clearly not averse to putting a thumb on the scales itself, in the service of its own priorities.

Away from CERAWeek, one of the biggest energy stories was the visit of Saudi Arabia’s Crown Prince Mohammed bin Salman to the UK. One of the big issues for Britain in its relationship with Saudi Arabia is whether the international listing planned for Saudi Aramco will be in London. Khalid al-Falih, the Saudi energy minister, helped raise London’s hopes, telling CNNMoney that “litigation and liability are a big concern in the US”, and hence a possible deterrent to a New York listing. However, Mr Falih also told Bloomberg that the international listing, originally scheduled for 2018, could now slip into next year. John Kemp of Reuters articulated an idea that has been rumbling around the industry for a while: the international listing of Saudi Aramco might never happen.

Quote of the week

“We’ve seen five IOC companies being sued for frivolous climate change allegations. That just draws a lot of risk on to our company, and quite frankly Saudi Aramco is too big and too important for the kingdom to be subjected to that kind of risk.” — Khalid al-Falih, Saudi Arabia’s energy minister, warns that New York City’s legal action against ExxonMobil, BP and other international oil companies over climate change is a reason not to bring Saudi Aramco’s international listing to the US

Chart of the day

In ExxonMobil’s presentation to analysts in New York this week, chief executive Darren Woods showed this chart of long-run oil prices, in constant 2017 dollars. His argument was to demonstrate that over the past 30 years oil prices have varied widely, and Exxon’s assets have had to perform in very different conditions. The point he did not make was that by the standards of the past three decades, oil prices today seem relatively high. A sign that the marginal barrels now come from more expensive sources, in shales and deep water? Or a warning that we could be heading for another fall?